FM should chop special tax concessions in Union Budget: NCAER chief

New Delhi: While 1991 saw the deregulation of product markets and reduced the rigours of the licence-permit raj, it didn't deal with liberalising the other factor markets - land or labour.

In an exclusive interview with Firstpost, the Director General of the National Council of Applied Economic Research (NCAER) and former World Bank economist, Dr Shekhar Shah, underlines what is most needed in this year's budget and the approach it should take.

According to him, India's fiscal deficit is the biggest challenge Finance Minister P Chidambaram faces and since he has indicated that he will have limited ability to raise revenues, a lot of the work will have to be done on the expenditure side.

To remedy this situation, Shah hopes that the budget removes some of the tax concessions which were part of the fiscal stimulus after the 2008 recession. He also suggests that the disinvestment programme should be accelerated and the subsidies on food, fertiliser and petroleum are reduced.

On tax rates, Shah suspects that the FM's main concern will be about maintaining the stability of tax rates.

Shah is of the opinion that the petroleum subsidy is the easiest one to handle, but politically one of the toughest. While he has welcomed the government's efforts to limit subsidised LPG cylinders to nine and the green signal to oil companies to raise diesel prices in small doses, Shah has said that the government should press on and not buckle under pressure.

Backing the direct cash transfers scheme and the Aadhaar unique ID, Shah said it will enable removal of much duplication and leakage from our subsidy systems; but he said the government needs to give the food security bill some thought.

“On food we have a problem, because, on the one hand, we are trying to move forward with cash transfers, by removing duplication and waste. On the other hand, we are looking at the Food Security Bill which is doing exactly the opposite. I think some more thought needs to be given to this tension where the left hand, which is the Food Security Bill, doesn't know what the right hand, which is the cash transfer, is doing. They are just philosophically, operationally and economically completely different in their thinking. That kind of betrays the pulls and pressures that the government is subject to,” he said.

The fertiliser subsidy, too, has always been a huge problem for the Indian state and Shah suggests that we move from producer subsidies to directly providing subsidised fertilisers or vouchers to below-poverty-line farmers – another area where the Aadhaar number and project will provide a great possibility of doing all this.

On tax rates, Shah suspects that the FM's main concern will be about maintaining the stability of tax rates. He, however, subscribes to some of the recommendations of the Kelkar Committee Report which has talked about removing some of the special exemptions. “I think those need to be phased out as quickly as possible,” he said.

The other important areas that Chidambaram needs to work on are the Direct Tax Code (DTC) and the Goods and Services Tax (GST). “I'm told that there are certain versions of the DTC. The Kelkar Committee is concerned about this and, I think rightly so, that the DTC may reduce tax intake and, therefore, needs to be looked at very carefully in terms of how it is phased in. But in terms of GST, we know that it's going to be a very important impetus to better tax administration and tax collection,” Shah said.

The Budget this year also needs to address the investment climate – and not just by way of interest rates. It needs to also be about the approval process – a huge chunk of which consists of land acquisition and environmental clearances. FDI in retail has created an opening, Shah said, but the manner in which some of the proposals are being dealt with are not in the spirit of opening up FDI in retail.

“On environmental clearances, I can understand that there are concerns that have to be kept in mind (we must safeguard the environment for future generations), and there I can understand some of the hesitation, some of the need for due diligence, for compliance – that takes time,” he said, adding, “But the land acquisition bill is going to be extremely important. How the regulations around them are framed and how they are implemented is going to be very important,” he said.

Shah is of the opinion that one has to take a short-run-long-run structural lens and see what can be done in the budget. But the budget must put in enough markers for the road ahead and for future governments.

“I hope to see a budget that not just looks good...but we want to make sure that there is discipline that follows after that, because if a budget looks great but there are supplementary grants coming through the rest of the year, that could be a washout and the impact of the economy is going to be much less there,” Shah said.

NCAER's January 2012 Quarterly Review of the Indian economy predicts a GDP growth of 5.6 percent in 2012-13. However, its preliminary estimates from the quarterly model predict a growth rate of 6.1 percent in 2013-14, with the annual model predicting a rate of 6.2 percent.